We use cookies that are necessary to make our site work as well as analytics cookie and third-party cookies to monitor our traffic and to personalise content and ads.
Please click “Cookies Settings” for details on how to withdraw your consent and how to block cookies. For more detailed information about the cookies we use and of who we work this see our cookies policy
Necessary cookies:
Necessary cookies help make a website usable by enabling basic functions like page navigation and access to secure areas of the website and cannot be switched off in our systems. You can set your browser to block or alert you about these cookies, but some parts of the site will then not work. The website cannot function properly without these cookies.
Statistic and marketing cookies:
Statistic cookies help website owners to understand how visitors interact with websites by collecting and reporting information
Marketing cookies are used to track visitors across websites. The intention is to display ads that are relevant and engaging for the individual user and thereby more valuable for publishers and third party advertisers. We work with third parties and make use of third party cookies to make advertising messaging more relevant to you both on and off this website.
Investors focus on system changes at the LOIM Transition Investment Summit
key takeaways.
System change investing involves identifying where responses to pain points are accelerating shifts to more sustainable business models
At LOIM, we see system changes taking shape around four key areas of the economy, driving the transition to a net zero, nature-positive, socially constructive and digitally enabled end state
By understanding the economic implications, we can identify mispriced opportunities across asset classes in both public and private markets. These were among the main topics of discussion at LOIM’s third Transition Investment Summit.
We are on the verge of seeing changes to our global economic systems unfold at a staggering rate. Driven by societal need and accelerated innovation, we believe these shifts will reshape industries and power the sustainability transition. LOIM’s third Transition Investment Summit (TIS) in London focused on how understanding system changes offers a powerful framework for sustainable investing, irrespective of near-term headwinds.
Watch this video for insights from key speakers at the Transition Investment Summit:
What defines markets
We have learned through the years that financial markets ultimately are not defined by near-term disruptions like inflationary shocks, geopolitical conflict, or policy and trade disputes.
Rather, markets are shaped over the long term by changes to the very structure and organisation of the global economy. Such shifts have occurred many times before as new systems emerged to replace old ones (e.g., the introduction of the railways), but not at the scale and speed of the current transformations taking place.
Amplified by policy forces and digital innovation, the stage is set for global system changes spanning all areas of the economy and financial markets. LOIM’s recent TIS brought together investment experts and economic researchers to explore the multifaceted portfolio opportunities this will bring.
“We believe this is the most important investment return conversation we can have with our clients”, said Hubert Keller, Senior Managing Partner of Lombard Odier Group. “This isn’t a conversation to have in five or 10 years; it’s one we need to have right now because free market forces are incredibly powerful and don’t wait”.
We see today’s catalysts for systems change driving the transition away from the emissions- and resource-intensive economy that evolved from the Industrial Revolution. A new economic model will take its place – one that net zero, nature-positive, socially constructive and digitally enabled. We refer to this as the CLIC® economy because it is circular, lean, inclusive and clean.
“This isn’t a conversation to have in five or 10 years; it’s one we need to have right now because free market forces are incredibly powerful and don’t wait”.
Hubert Keller,
Senior Managing Partner of Lombard Odier Group
System change analysis aligns with LOIM’s view on sustainable investing: to succeed over the long term, it must be rooted in economic logic. The reorganisation of value chains and profit pools will result from superior economics, technological advancement and corporate innovation – not wishful thinking.
Stronger, mission-oriented collaboration between the state and the private sector can dramatically accelerate the transition, said Mariana Mazzucato, Professor in the Economics of Innovation and Public Value, University College London, who delivered the keynote address at TIS.
Mariana Mazzucato, Professor in the Economics of Innovation and Public Value, University College London
She cited the example of how the initial development of innovations such as the internet and GPS were largely state-funded and then later leveraged by private companies.
“With problems like biodiversity collapse and climate change – what does it mean to see them as opportunities for problem-solving that can spur the much-needed public and private sector investment?” Mazzucato said. “We don’t think about what it means to put the environmental transition, climate, health at the centre of how we think about the economy.”
The rise of alternative systems
The catalysts for system change are what we define as pain points – where existing models reach their limits and become unviable, fuelling the rise of alternative systems. We see four main pain points today. They are outlined in the table below along with their corresponding system changes and resulting outcomes, or end states:
Propelled by the use of new materials and processes, each of these end states will offer up investment opportunities. Innovative companies will provide the products and services that will power the new economy as the transition drives capital deployment and earnings growth.
“A broad problem set provides a broad opportunity set as you look for those companies that find solutions to those problems”, said Nicholette MacDonald-Brown, Head of Sustainable Equities, LOIM, during TIS.
System-change analysis allows for the creation of diversified investment strategies, along with focused products targeting specific parts of the transition.
“We can choose to stop talking about sustainability and climate change, but doing that merely leaves underlying pain points unaddressed, causing them to grow and only gain in importance and relevance to our investment conviction”, said Thomas Hohne-Sparborth, Head of Sustainability Research, LOIM.
“We are trying to help our clients invest in tomorrow's economy,” Keller said. “Value chains will be completely reconfigured in some sectors. New business models will emerge and existing ones disappear”.
More efficient energy systems are being formed, for example, built around electrification, flexibility and smartification. With the energy system accounting for over 74% of emissions, much of the disruption will be concentrated here1.
The climate transition poses unique challenges across all sectors of the economy, and we expect adaptation to move up the political and economic agenda. Infrastructure spending is likely to increase as physical disruption becomes commonplace.
“Imagine if we treated social goals like we did the Moonshot?” Mazzucato said, citing the example of how dynamic public/private partnerships during the 1960s space race sparked innovations in a variety of areas. “Climate change isn’t just about renewable energy, and the space race wasn’t just about aerospace”.
Systems will also evolve to preserve and leverage nature. A nature-positive investment approach can be pursued through regenerative value chains, with both bio-based and precision agricultural practises becoming commonplace. A strategic allocation to real assets like farmland offers valuable diversification.
“As long-term investors, it’s just basic maths”, said Becky LeAnstey, Investment Manager, Environment Agency, during her TIS presentation. “If we want to keep making money and profiting from these investments, then we need to make sure the resources they rely on are secure and can regenerate themselves”.
A rethink of social systems is becoming imperative, and new ways to deliver goods and services will disrupt the economy. For example, we expect health spending to shift to prevention, and tackling underlying risk and lifestyle factors. Connectivity will bring more inclusive access to financial services, with financial technology providing more cost-efficient systems that widen reach. Affordable housing and more affordable, sustainable options for discretionary consumption will become standard.
“On the social side there are a lot of crises – the housing crisis, the pension crisis, the healthcare crisis, educational crisis, you name it. The problem is that the government also has a crisis, called the debt crisis. So solutions need to come from private side”.
Jeroen van Oerle,
Portfolio Manager at LOIM
Technology, data and AI will be the common thread throughout all of the other system changes. They will act as the digital spine of the transition, enabling innovation and the adoption and scaling of winning solutions across a range of industries, from energy and agriculture to healthcare and manufacturing.
Understanding the economic responses to pain points makes it possible to look for areas where markets underestimate the speed, scale and scope of the transition. Through fundamental analysis, we can identify companies with the most potential to leverage the shifts. We can then hunt for those with mispriced structural growth and resilient multiples.
The fact that fewer investors may be focusing on sustainability at the moment only heightens the investment case, according to MacDonald-Brown.
Nicholette MacDonald-Brown, Head of Sustainable Equities, LOIM
“What’s crucial is you have conviction in something that isn’t priced into the market”, she said. “As all successful investors will tell you, popularity is one of the biggest risks – you actually want to look in the grey, less popular areas, and we believe sustainability sits in that camp at the moment”.
In our view, sustainable investing must be approached from an economic perspective to form conviction on the clearest path to sustainable outcomes. That path may be impacted by policymaking, but is unlikely to be derailed.
Shifts to more sustainable business models are accelerating due to economic need, leading to evolutions in supply and demand. The changes will put existing business models at risk, while creating exciting opportunities for those who can recognise and act on them.
“Policy can indeed accelerate the transition, and it can also slow the transition”, Keller said. “But we really don't think that policy can derail things that make much more sense – not only from an environmental or social perspective, but from a basic economic perspective”.
view sources.
+
1 Emissions Database for Global Atmospheric Research (EDGAR, 2024). GHG Emissions of all countries. Fossil CO2 emissions are estimated to have accounted for 73.7% of global GHG emissions in 2023.
important information.
For professional investors use only
This document is a Corporate Communication for Professional Investors only and is not a marketing communication related to a fund, an investment product or investment services in your country. This document is not intended to provide investment, tax, accounting, professional or legal advice.
